How To Get A Startup Business Loan
Although it is harder for startup businesses to get a loan, it is still possible. The best way to improve your approval chances is to choose the right type and amount of financing. Also, make sure you are familiar with your credit score and find the most competitive loans. How to get a loan for a startup business.
1. Assess the type of loan you need
Many small-business owners prefer traditional banks and credit unions for financing. There are many types of financing available that can help start-ups get off the ground. These are some of the most common types of startup loans:
- Online term loan. Online and traditional lenders can issue term loans. They consist of a bank lending a lump sum of money, which is then repaid over a specified period at a fixed interest rate. The best small-business loans have an annual percentage rate (APR) of 9%. Maximum limits range from $250,000 to $500,000. Startup owners may not be eligible for the highest loan amounts or most competitive interest rates.
- Business credit. A business line of credit allows a lender to extend funds up until a specified amount. The business owner can then access the financing as needed. Only the credit line used from month to month is subject to interest. The borrower can also access the funds multiple times after making the required payments.
- SBA 7 (a) loans. The U.S. Small Business Administration offers 7(a), business loans of up to $5,000,000 to qualified applicants. The interest rates for funds can be used to pay working capital, equipment purchases, or business expansion expenses.
- SBA microloans. Eligible business owners can get SBA Microloans up to $50,000. The loans are usually offered to entrepreneurs in economically disadvantaged areas, as well as to women and minorities. The lender may offer repayment terms up to six years with interest rates that range from 8%-13%.
- Asset-based financing. A form of secured financing, asset-based financing allows startup owners to borrow against valuable assets such as inventory, machinery, equipment, and accounts receivable. Lenders are less likely to lend on this type of financing, which makes it more attractive than other types of loans. Secured financing allows the bank to repossess collateral in the event of default by the borrower.
2. Examine your personal and business credit scores
Lenders assess an applicant’s credit score in order to determine the risk they are taking. Higher credit scores are more likely to pay on time and have better approval chances. Business credit scores are usually available after six months to one-year of operation. Startups may not have one, particularly if they are new.
However, personal guarantees are common for loans. This means that the borrower agrees to repay the debt using their personal funds in the event of default by the business. Lenders also consider the credit score of the applicant/business owner.
Before applying for a loan, prepare yourself for the application process. You can request copies of your business credit reports and check your personal credit score .